After three quiet quarters, Hindustan Construction Company’s (HCC) order book improved visibly in the March quarter, indicating better prospects for the future. HCC recently announced its results for 2009-10 wherein revenues grew 10 per cent and adjusted net profit 25 per cent. The marginal revenue growth was due to the overall slowdown in the sector last year.
Also, revenues and working capital were hit due to its exposure (26 per cent of the order book in 2008-09) to Andhra Pradesh, where government projects and payments were delayed. However, its exposure has now come down to 18 per cent of order book and payments have been received up to January 2010.
Huge opportunities
HCC, which is a leading player in the construction of irrigation, water and hydro power projects, has been a key beneficiary of capex in these segments. Its order book stands at Rs 18,800 crore at present, which is 5.2 times its 2009-10 revenues. Notably, HCC aims to increase its order book size to Rs 25,000 crore by the end of 2010-11, which looks achievable, given the strong pipeline of investments.
According to CRISIL Research, over Rs 1,00,000 crore will be invested in the power and irrigation projects during 2010-14, which is a sizeable jump compared to the Rs 40,000 crore invested in last four years.
| ON SOLID GROUND | |||
| In Rs cr | FY10 | FY11E | FY12E |
| Sales | 3629.0 | 4,550 | 5,730 |
| OPM (%) | 12.2 | 12.9 | 13 |
| Interest exp | 205 | 245 | 290 |
| Net profit | 81 | 140 | 195 |
| EPS (Rs) | 2.6 | 4.6 | 6.2 |
| Debt/equity (x) | 1.7 | 1.7 | 1.6 |
| PE (x) | 48.8 | 27.7 | 20.5 |
| E: Analyst' estimates | |||
Diversification
HCC has six road BOT (build, operate and transfer) projects, valued at about Rs 5,500 crore. It will further bid for road, hydro power, airport and port projects. The company intends to take its BOT portfolio to Rs 15,000 crore by 2013-14. HCC also has big plans in the real estate space. While its Lavasa project has already started contributing, it still has a long way to go as the company will be monetising the land over several years. The Lavasa subsidiary reported Rs 480 crore of revenues (up 127 per cent year-on-year) and Rs 140 crore of net profit in 2009-10.
Besides, in its Mumbai project 247 Park, the first phase of 1.8 million square feet is already developed and 88 per cent is leased at Rs 70 per square feet.
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In the second phase (next two years), it will construct 1.6 million square feet. It is also developing an SRA (Slum Rehabilitation Authority-recognised) project at Vikhroli, in Mumbai, in three phases. The first phase will involve development of 8,00,000 square feet.
To strengthen the real estate business, HCC acquired 66 per cent stake in Swiss company Karl Steiner, which specialises in high rise and relatively complex projects.
Investment rationale
Backed by a strong order book and improving sector outlook, HCC’s revenues are expected to grow over 25 per cent annually over the next two years. Also, better margins, lower interest costs and contribution from other businesses could boost the company's profits growth.
Due to its different businesses, analysts value the stock at Rs 150-155 on the basis of sum-of-the-part valuations. Investors with a long-term view can invest in HCC (at Rs 123.25), which will be a key beneficiary of the increasing opportunities in the infrastructure sector.